FACEBOOK, UTODA AND THE UGANDAN BUSINESSMAN’S FATE

Facebook last week announced that its much anticipated share sale was going into its final stages. The Initial Public Offering (IPO) when it comes to the market could value the hugely popular social interaction site at as much as $100b. The original concept was hatched to slight an ex-girlfriend in 2004 out of founder Mark Zuckerberg’s university room.

Zukerberg, whose interest in the company would be valued at upwards of $18b – or larger than the economy of Uganda, is only 27.

Nearer to home multi-billion shilling concern UTODA (Uganda Taxi Owners & Drivers Association) saw their knees chopped from under them when KCCA took over the running of Kampala’s taxi parks.

UTODA, which was set up ostensibly to represent the rights of taxi owners and drivers, has run – or run down, the parks since 1993. By losing the contract UTODA will go into the record books, next only to mobile provider Celtel, which ceded its control of the mobile phone industry to MTN at the end of the 1990s, as a company that took for granted and let slip a Godsend of a deal.

While UTODA is a test case of how not to run a monopoly, Facebook is very much the opposite.

Last week Zuckerberg wrote a letter to his shareholders outlining his company’s reason for its existence, its vision and explaining why facebook is going public.

“Facebook was not originally created to be a company. It was built to accomplish a social mission – to make the world more open and connected. … Most great people care primarily about building and being a part of great things, but they also want to make money. …These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits,” he said.
Three things stand out in the above that successful businesses are created to meet human needs, secondly great business are driven by great men motivated by creating great things and finally, that profit is not the be all and end all of business.
And the kid should know. He has built a company bigger than the economy of East Africa from a standing start in 2004.
Obviously this letter came too late for the old men of UTODA.

In a new publication “50th Uganda; Past, Present, Future” published by the Vision Group and currently on the shelves, I suggest that the Ugandan businessman as we know him now – single proprietorship, running a local operation and continually plundering the business capital, will be extinct in the next half century.
Years of instability and questionable national policies have not helped the indigenous businessman. With the collapse of national borders the Ugandan businessman has no time to go through the usual evolutionary processes, he has to quickly identify his competitive advantages, aggregate their resources to become more formidable enterprises and be pen to partnerships with foreign investors.

Nationalistic sentiment will balk at the idea, but the way things are going there is a real threat that Ugandan businessmen will be relegated to corner shops or as bit players in the economy. And they can rest assured the consumer will not be in their corner especially if foreign concerns are providing satisfactory service.

What does it matter if our local businessmen get swept off onto the dung heap of history? Local businessmen are more likely to opt for local over foreign suppliers, local businessmen are more likely to reinvest profits in the economy and local businessmen will be less aloof of local politics, interested in continued and sustainable stability.

As a start local businessmen would do themselves a lot of good to refocus themselves towards providing a service first, in the faith that once this is done profit will be the welcome byproduct.

By focusing on a goal greater than themselves issues of forming partnerships for example, will not seem so abhorrent.

In Asia, in the middle of the last century, some governments forced some companies to merge in order to compete and were favoured as national champions to expand out of their respective countries.

For that to work however you have to have a firm entrepreneurial base otherwise government as often happens, will end up throwing good money after bad.

Back to UTODA, there is unlikely to be any tears shed for their demise, which is not a good place to be for any business to be, because at the end of the day the business’ clients are the best guarantors of its survival.

UGANDA’S ECONOMIC CRISIS SOWN IN COLONIAL TIMES

The decision to not make Uganda a settler colony, the nationalization of companies, the expulsion of the Asians and the liberalization of the economy under the NRM are arguably the biggest decisions that continue to reverberate through the economy.

Fifty years after independence services account for about half of GDP, industry 25.1% and Agriculture 22.2%. As economies develop, agriculture significance reduces as manufacturing and services not only create more value from agricultural commodities among other things but also that manufacturing and services employ more and more.
In Uganda however Agriculture employs four in every five workers while industry employs five percent and Services about 13% according to 2009 estimates.

What this means is that the overwhelming majority of Ugandans have been left behind by the economic boom of the last 26 years as most of the growth has come from the services and the manufacturing sectors.

To ferret out the root of this problem you would have to go back to the beginning of the last century to see how this came about.

"Sir James Hayes Sadler, who was a commissioner of Uganda between 1901 and 1907, decided that Uganda was not attractive for human settlement. The hot humid climate, which came with malaria infestations and the tse tse fly, he decided should best left to the Africans. The tse tse fly and the distance from the sea, would make commercial agriculture untenable....

Sir Hesketh Bell, who came after Sadler, was also sold on the idea and did little to encourage European settlement.

While in neighbouring Kenya the temperate climate of the highlands straddling the rift valley were more suited to the settler and with the large unoccupied tracts of land could engage in commercial agriculture.

The repercussions of this single decision – despite massive pressure from certain quarters to allow for European settlement a la Kenya, is that our tenure system was not regularized.

To do commercial agriculture you cannot afford a disparity of the tenure system that currently exists in Uganda, but not in Kenya or Zimbabwe or South Africa, British colonies on the continent. In these colonies all the arable land is titled meaning it can be verified, transferred or collatralised. Land becomes a commodity and attains commercial value.

So in the wish to develop Uganda as an African state small holders farmers were used to plant cash crops – cotton, coffee and tea. The introduction of poll tax and the harsh penalties one would incur if they did not pay, served as incentive enough for farmers to grow cash crops.

"So successful was the cash crop economy, mainly due to cotton, that the British treasury stopped subsidizing the Uganda administration in 1914...

Shut out of production the European and Asians found themselves restricted to the commercial and processing side of agricultural produce.

If Sadler and Bell thought there were doing the African a favour by keeping settlers off the land the unintended consequence – or was it?, is that the European and Asians ended up controlling the more lucrative parts of the value chain.

As a result by the 1970s a handful of families – mostly Asian, controlled more than a third of the economy of Uganda.

Milton Obote, with his move to the left attempted to redress this by nationalizing enterprises, reasoning that by having the government hold and run this assets in trust for Ugandans would redress the wealth disparities.

Analysts of the time say with his slap dash nationalization policy Obote “disenfranchised the non-citizens who run the economy without empowering the Africans who had not been allowed to participate in commerce, industry and large-scale agriculture” – a recipe for disaster.

His successor Idi Amin while becoming increasingly isolated from his erstwhile sponsors, especially the British, and hoping to bolster his local support expelled the Asians in 1972 at the height of his economic war.

The vacuum caused by these efforts at “nationalization” accelerated the economy’s down turn.

"In his native wisdom Amin sought to slow the slide by publicly executing or torturing people involved in economic crimes – hoarding, smuggling, overcharging and dealing in foreign exchange....

The extent of the destruction of the economy is captured by the fact that of the 930 companies registered in 1971 only 300 remained by the time of Amin's demise in 1979 operating at five percent of capacity. The economy had shrunk by an annual one percent, while the population continued to grow. All sectors collapsed apart from subsistence agriculture, for lack of imported inputs.

Obote’s second administration was dogged by insecurity, although some progress was made at recovery. The economy grew by 5.5% and inflation fell to 20% while the share of agriculture fell from 70.5% of to about 50% of GDP.

The NRM’s triumphant entry into Kampala in January 1986 was therefore tempered by the reality of a basket case economy and enormity of the task of resurrecting it.

"In 1986 per capita GDP was less than half what it was fifteen years earlier, the government tax base had collapsed as subsistence agriculture and the informal sector accounted for almost all of economic output...

A country is only as viable as its private sector, because it is the private sector that pays the taxes that sustain governments and finance infrastructure and social services.

In the beginning the NRM deeply opposed donor prescriptions for the economy. It revalued the shilling, allocated commodities administratively, sought to control prices and maintain the parastatal monopolies.

But there was only so much a government with empty coffers could do.

Years after Obote’s nationalization drive and Amin’s expulsion of the Asians no comparable indigenous business class had emerged to fill the void left, by these well-meaning but disastrous attempts at economic engineering.

"Faced with the urgent need to jump start the economy with little money to sustain its central planning agenda the NRM did an about face invited the Asians back -- a process that begun with the Obote II government, privatized state corporations and liberalized the markets....

This was the much needed shot in the arm the economy needed.

A combination of these policies in addition to liberal dozes of foreign aid have seen the country enjoy its longest stretch of economic growth in the last 50 years.

Revenues are up a thousand fold from 1986, manufacturing and services now dominate economic output and exports have been diversified away from coffee.

Uganda in recent years has been judged the most entrepreneurial country in the world. The nationalization of enterprises, the expulsion of the Asians and hard economic times could take the credit for bringing about this situation. The challenge though is, for lack of know how the indigenous Ugandan businessman has failed to graduate from a subsistence businessman. To get to the next level the Ugandan businessman would have to learn how to aggregate his efforts with partners in order to pursue ambitions beyond his own personal upkeep.

"The frustration of the colonial settler farmer and the expulsion of the Asians denied Ugandans that skill transfer and the insecurity of the 1970s and 1980s short circuited the learning process further...

As a result of these decisions taken generations ago we find ourselves in a high inflationary situation partly because our agricultural production could not fill a regional gap left by drought that hit Kenya last year. While we continue to be donor dependent because the informal sector continues to dominate the economy and hence a narrow tax base.

Going forward – and politics aside, the resolution of our land tenure system and the development of a more credible entrepreneurial class will determine whether we continue on a growth trajectory or not.

WHAT IF UGANDA HAD NOT BITTEN THE BULLET

This week the nation commemorated the 26th anniversary of the coming to power of the NRM in 1986.

The New Vision has been running the Golden Jubilee project, which looks back on the last fifty years of the country. In addition a magazine due out soon will poll various experts on their opinion on how Uganda will look 50 years from now.

In the last 26 years the thing that stands out is the revival of the Ugandan economy. It has been interesting revisiting what this government did to turn around the economy.

"There still is a lot to do and in hindsight we could have done a few things differently but we are far better off than we were in 1986. The discontent with economy is more that our expectations have been raised and we have come to expect better and better from the economy from our government...

And that is always the danger of success for every organization or government that has shown some initial success, you eventually become a victim of your own success. Keeping up with the expectations you have created becomes the loadstone around your neck. Ask Arsenal.

It’s a hard to talk about economic recovery when the economy is going through the worst times in more than two decades, but if we step away we can discern the forest from the trees.

"Releasing the energy of the private sector by rolling back government’s role in business and creating a more liberalized environment for it to thrive have been at the center of the economy’s recovery...

We take it for granted now but making the decision to empower the private sector came up against a lot of resistance from the populists, inside and outside government, who wanted to jettison the donors and revive the economy by central planning.

What if the populists had won the day and by some miracle their thinking had held sway to the present, what would Uganda look like?

The main areas of growth over the last two decades have been services and industry which grew as a total of economic output (GDP) to 52% and 25% from about 20% and three percent in 1986 respectively.

The explosion in services came with the liberalization of the telecommunications, retail and finance sectors. The entrance of MTN, supermarket chains like Uchumi, Nakumatt and Shoprite and the beefing up of their presence by banks like Stanbic, Standard Chartered and Barclays – all private enterprises have spearheaded this boom.

If government had insisted of keeping private money out and retained its stranglehold of the telecom sector through Uganda Posts & Telecommunications Corporation (UPTC) or banking through Uganda Commercial Bank or retail shopping through Foods & Beverages it would be doubtful whether things would be the same.

Government bureaucracies are not wired to be commercially efficient deriving their raison d’etre from more than commercial considerations. The inefficiencies we were used to from government corporations were mainly structural – meaning they couldn’t help themselves but be inefficient due to the structure of incentives, there was no competition and therefore no reason to fight to increase market share.

As a result government would have continued to sustain these inefficient firms at the expense of spreading social services and building infrastructure, affecting the corporations ensuring they continue to be a drain on the economy. A vicious cycle.

"We should also keep in mind that the problems of our failed companies beyond political interference, was a lack of managerial capacity. With due respect to the respective managers at the time. Were they managerial or entrepreneurial savvy many of them who were retrenched would have started up companies that would be household names by now more than 20 years later...

The thinking that was against opening up the economy to private players feared that more liquid foreign players would overran the economy buying all the privatized firms or taking advantage of abolition of government monopolies to set up monopolies of their own.

These fears have come largely to pass with the major business concerns in whatever sector being controlled by foreign capital. However this has been largely mitigated by the wide availability of goods and services, increase in available jobs and improved tax collections.

That all being said after two decades its time to take stock and ask ourselves whether the model we have pursued still holds.

Two things can be counted as major failings – the inability to use agriculture as the springboard for industrialization and the lack of a more credible indigenous entrepreneurial class.

Agricultures share of GDP’s collapse to less than a fifth from more than a half in 1986 reflect the normal progression of economies, but in our case our farmers have remained largely subsistence. At the root of the problem is our land tenure system which in many parts of central, east and northern Uganda does not lend itself to commercial exploitation.

"The indigenous business community’s seeds of destruction were sown a lot earlier, so that by the time the NRM came to power our business community was largely subsistence, unable to aggregate into formidable concerns that could take advantage of economies of scale and shut out foreign interests – like Kenya’s business community is doing with some limited success...

In My mind resolving those two issues by government but mostly by our own entrepreneurs will determine whether this economic recovery continues or fizzles out in coming years.

THE MARKET IS OUR BEST HOPE

Half a century after independence Uganda has come to another cross roads in its economic history.

The economy is working its way through the worst shock since the Kenyan post-election violence of 2008.

At that time for a few days our lifeline to the sea, the Mombasa road was impassable, patrolled by crazed gangs of ethnic cleansers and opportunistic looters. In Kibera, allegations that Uganda was involved in putting down riots in western Kenya so incensed the mobs that they tore out sections of the railway line to Uganda. Never underestimate the foolishness of people in big numbers, they say.

Subsequent fuel shortages caused inflation to spike to just under 15%. Thankfully the drama was short lived, the Kenyans came to a compromise of sorts, and we went back to business as usual.

But we probably have to look back to the early 1990s when government embraced fiscal discipline, to find a comparable period of personal distress as we are going through now.

Last year inflation hit record highs peaking at 30% before slipping back to 27% by year end. The spike was triggered by higher food prices and a falling shilling against.

And as they say problems rarely come alone, the failure to get Bujagali online at the end of last year caused further gloom as government, unable to continue subsidizing expensive diesel generators, lifted the subsidies pushing up power tariffs by as much as 69% last week.

In recent weeks city traders have threatened strike action in protest against the rising lending rates and power distributor Umeme, who they blame – erroneously, for the persistent load shedding.

The traders want government to prevail on the banks to lower lending rates and to cancel Umeme’s concession. Neither of which is likely to happen.

Earlier last year they had threatened strike action again, this time because the dollar was going through the roof.

The high lending rates are the price we have to pay for lowering inflation and strengthening the shilling.



Traders have been the largest beneficiaries of the country’s adoption of a free market economy. Setting prices, sourcing goods where they please and building up their wealth largely unmolested.

But the market, which they so love, has to be maintained and every so often desperate measures have to be taken to stabilize it. And that is what is happening now.

To continue or not to continue with the market economy, that is the question at the heart of what the traders are asking for.

Government pandering to short term discomfort can very well issue an edict to banks to lower interest rates.

Banks will stop lending to business and start lending money to government by buying better yielding risk free treasury bills and bonds. The lower lending to the private sector will slow production and weaken the shilling, partly because the banks will convert their holdings into hard currency and look to cash in on a weaker shilling or repatriate the money all together to more benign economies.

Of course the government can jump up and forbid them to send their money out of the country. But as always happens in these situations a black market – called a parallel market in polite company, develops with rates reflecting the real market reality. If you think loan shark rates are high, you wait for the black market!

The traders, more than the rest of us, are feeling real pain. Many risk losing their businesses and property. We can wonder whether it is fair for them to pay for the sins of politicians and short sighted planners, but the truth is we find ourselves in this situation and what do we do?

It may bring short term relief for the traders if the government goes back to a price control situation however temporary but the eventual consequence for this will be economic distress leading to failure and business collapse, the very thing the traders are going to forestall.

At the risk of sounding callous in the current crisis there will be some business failures, it’s the brutal reality of the market, with the leaner more efficient operations coming out the other side of this tunnel of despair. But to even contemplate subverting the market using price controls will doom us to a fate worse than death.

But governments do not always operate by logic. Whether we roll back the market is really a function of politics. We can only wait and see.

But as an illustration of how the market knows no strongman.

In 2008 Zimbabwe’s inflation shot beyond 1000%. Zimbabwe’s Robert Mugabe ordered shopkeepers to revert to prices of a few months ago as a way to put the brakes on inflation. Shop shelves soon went empty and good uncle Bob arrested shopkeepers for hoarding and ranted at imperialistic plots to topple him.

He has since had to bow to the authority of the market but at what cost? Most transactions in Zimbabwe today are carried out in dollars —US not Zim dollars, meaning his monetary policy is being dictated from Washignton, a fate he tried to prevent.

UGANDA'S GRADUATES SHOULD KEEP THE FAITH

By Eva Wakabi, Guest Writer

This week marks the start of the real challenge for Makerere University’s 11,022 fresh graduates. After investing their money and their finest years in getting an education, the graduates have to go out to the real world – and make their investment pay.

The unbelievable atmosphere of pessimism which is gaining a stranglehold in this country is going to make many of those graduates give up without even trying. “There are no jobs out there for me, so why should I even try?”, one of the graduates told me yesterday, an admittedly good looking girl. “The only hope for me is to find a rich man who will take care of me. That is what I will concentrate my efforts on”. The Daily Monitor’s Tuesday headline (Abdu Kiyaga, “11,000 graduate to 83% joblessness”) reflects this pessimism.

But the truth is not so simple. Youth unemployment is unbearably high, but other statistics reveal why Uganda is considered an economic success story in many countries. In the 2012 Index of Economic Freedom, published last week by the Heritage Foundation in Washington, Uganda ranks first in East Africa in all economic parameters. The index, which ranks countries according to their financial, legal and regulatory environments, gave Uganda a grade of 61, four points above Kenya’s grade of 57. Uganda also ranked as the 8th best country in Africa in terms of doing business.

These are not the only numbers which reveal a different picture than the one we are used to reading about in the newspapers. Foreign Direct Investment in Uganda, it turns out, has reached a staggering $847.6 million in 2011, compared to only $133 million in Kenya.

And yet, when you open an average Ugandan newspaper (even the government owned “New Vision”), you don’t get these numbers. Ugandans generally don’t know that their country is the preferred investment destination in East Africa. They mostly get the impression that theirs is a country in severe crisis, with no hope in sight. Faced with such a presentation of reality, many of them give up and don’t even try.

Ugandans frown upon gradual, hard work, the kind that has built innumerable other countries, such as China, Singapore and (just next door) Rwanda. They don’t see the need for discipline in achieving their goals. Bad Black, the goddess of easy money, is an object of love and admiration – but when the President chooses to give the KIIRA EV project his unlimited backing and support, he becomes an object of scorn. And yet it is exactly those projects which have made Uganda a target of international investment. Building a country, those investors know, is slow, hard work. That is something we have yet to learn.

So to those graduates who have become discouraged at the headline which placed their odds of finding a job at only 17% (since a full 83% of all youths are allegedly unemployed – although this statistic has only an indirect connection to the much smaller segment of university graduates) – to those graduates who have given up, mentally, on making it in the real world without even trying, I say this: you live in a country with sound economic fundamentals. The rest is up to you. Don’t let anybody discourage you until you have made your fullest, most passionate efforts at success.

A lot have been said about our education system: the way it focuses on books and not real technology, and doesn’t give graduates hand on experience. This is gradually changing, and major global newspapers such as the New York Times have already reported that Makerere University has become a regional centre of excellence for IT. Possibly the solution is found in the direction already implemented by Kenya: more professional colleges and technical schools, less university enrollment.

Above all, we must remember: in this age of global competition, in which lifelong learning is mandatory and is no longer an option, and in which all the world’s information is at your fingertips via the Internet, success for those who really want to get it is more an option than ever before.

Worldwide, Uganda is considered a good place to do business. The fact that our most educated people are afraid of going into business, and instead seek the so-called safety of regular employment, is one of the reasons why so many foreigners control businesses here. Rather than scaring people off with gloomy reports and suggestive headlines, the media should try to reverse this trend. The fact that Uganda regularly gets top ratings as far as business friendliness is concerned means that you have more of a chance to succeed in business here than you realise. It’s all in your head.

Ms. Eva Wakabi is a Student of Law, living in Kampala.

NIGERIAN CENTRAL BANK GOVERNOR ON SUBSIDIES

"If you will patiently read this mail to the end you will understand my position. I am not complaining about insults I am used to that. I just believe that an insult is not an argument and when people resort to personal abuse they have run out of logic.
But to then go beyond me and extend it to my dead grandfather and his "descendants" ie my late father his siblings etc I think goes beyond the pale. As a Nigerian-and as an economist-I can take a position on economic matters and this position is one I have had for years even before coming in to the Central Bank. I have also explained the position on several occasions and criticised government for not doing this before.

"In 2010 at a public hearing in the House of Reps on the 25pct saga I alerted the nation of what I considered a potential big scam around subsidies and urged for its removal. No one paid attention. The economics is very clear to me. That it is unpopular is also understandable. The British public is unhappy with Tory budget cuts. The Greeks went on riot over austerity. Italian parliamentarians came to blows before Berlusconi was thrown out of office. The US congress is yet to approve Obamas tax increases.

"Economic decisions-by definition-ALWAYS must involve a cost or an opportunity cost since for them to qualify as economic they must involve a choice in resource allocation among competing uses. An enlightened debate is one that weighs the pros and cons of removing subsidy and continuing with it.
Removing it has costs in terms of Nigerians paying more for PMS-which by the way is not the fuel for generators, power plants, production facilities, heavy duty goods transportation trucks and even luxury buses. It is fuel used by the middle class and car owners to drive around town and from city to city not to employ workers and produce goods and services. Diesel which is critical to manufacturing and employment creation is not subsidized as the subsidy was removed years ago by Obasanjo. Nigerians said nothing then because it was blue collar workers that got retrenched by factories. Those speaking now on the Internet and Facebook and Twitter and newspapers are not workers but middle class elite who use PMS in their smart cars so let's stop all the ideological pretence. This is not about elite and masses but an intra-elite discourse.

"I will summarise the issues and I write as a Nigerian economist and public intellectual not as a public servant:

1. I am a strong advocate for subsidies if they are for production and not consumption, and if they benefit the poor and not middle men and rent seekers. The US government subsidizes cotton and wheat farmers and Nigeria spends its reserves importing wheat from America and keeping American farmers employed. The OECD countries pay subsidies to cattle farmers. Today Promasidor imports powdered milk from New Zealand and packages in Nigeria using our foreign exchange while we have cattle. WAMCO imports milk from the UK and adds water and tins it and calls it "production" of Peak milk. We use our Forex to import petroleum products and keep refineries and jobs open in Europe. Meanwhile precisely because of market distortions there can be no private sector investment in refineries since no one can make profit selling at the regulated price unless we are going to provide private refineries with crude for next to nothing. Certainly no one can purchase crude at market price, refine it and sell at N65 without huge losses so this explains why there are no private refineries.

2. What I mention above is the heart of the problem with government economic policy which needs to be changed. The economy since SAP is one that supports imported consumption and not local production, perpetuating dependency, non inclusive growth and insecurity. Why is it that the economy is growing at 7pct annually but the people are getting poorer. Because growth gains are not evenly distributed. Personal income is skewed towards people in the oil industry, telecomms, high finance, stock market, real estate and yes civil servants and politicians who feed on corruption. We produce crude oil but import petroleum products (today the UKs highest exports to Nigeria are petroleum products). We have a large cotton belt but import textiles from China (thus keeping their subsidized factories open and jobs in China). We are the world's number 1 producer of cassava but import cassava starch from Europe. We have a huge tomato belt in Kadawa, Jigawa and Chad basin but are the world's largest importer of tomato paste-from China and Italy. We can produce rice but we import rice from Thailand and India-most of it from grain reserves that have been in stock for over 5 years...I can go on and on
3. If above is clear then it is evident that this trajectory can only lead to disaster. We will continue to spend our resources promoting growth and employment in our trading partners. Terms of trade shift against us, we can only have foreign reserves because by the good grace of God we have Oil which will be exhausted soon and with new discoveries may become so cheap it loses value. We don't create any value added jobs as the only real production is peasant farming. Oil, telecomms, finance and real estate are not employment intensive. So everyone becomes a civil servant as the economy cannot create jobs. Result? In 2012 budget out of a total N1.8tr recurrent expenditure for the executive arm N1.6tr is on personnel costs not overheads. To reduce this you have to cut salaries or pensions or retrench civil servants. This is the classic trajectory of underdevelopment, de-development and de-industrialisation.

4. For the above reasons I am a strong proponent of structural reform and this begins from the fiscal framework. The limited resources of government should be allocated to supporting production-especially if we are running a budget deficit. We cannot keep borrowing to support conspicuous consumption. To support a job creating economy we need to fund power, transportation infrastructure, market infrastructure and access, technical and vocational education etc. We need to build rice processing plants, produce starch and cassava flour and ethanol, process our tomato and milk locally, regenerate our textiles firms (which used to employ 600,000 workers but now employ 30,000!), refine our own crude etc. We cannot even begin to do this if 30pct of govt expenditure is on fuel subsidy, if out of the balance 70pct is recurrent spending, 10pct is debt service, 10pct goes to the Niger Delta and only 10pct is capital expenditure. So it is about a choice-what do we spend money on and how do we allocate resources?

5. We often compare ourselves to other oil producing countries like Saudi Arabia. What are the facts? With a population of over 160m we produce 2mbpd ie 1 barrel for every 80+ citizens daily. Govt share of revenues is like 50pct of every barrel so it is effectively a barrel for 160 citizens. Saudi Arabia with a 24m population produces over 8mbpd or one barrel for every 3 citizens. In fact in 2010 the nearest OPEC country to Nigeria in production per capita was Algeria with a barrel for 30 and Algeria is more gas than oil.

"With one barrel for 3 citizens daily Saudi Arabia is able to provide infrastructure, education, healthcare and social safety nets and have huge savings. It can provide subsidised fuel at a total cost that is a fraction of its savings and even export refined products. It is paying for subsidies out its fiscal savings and not borrowing to pay. We are like a poor man with a rich neighbour. The neighbour builds a good house, buys several cars, eat expensive food, travel abroad every year and still have huge balances in several current accounts. Then you choose to live that lifestyle and mortgage your house, take an overdraft from the bank to finance it. Next year it is time to repay the bank, you don't have the money so you go to another bank, borrow enough to pay the first bank principal plus interest and also fund the continuation of the lifestyle. It continues till you can't borrow anymore and the bank throws you and your family out of your house and you lose everything. A responsible father would have long since faced reality and told his family he doesn't earn as much as his neighbour and expectations need to be moderated if they to keep their roof. Of course the children won't be happy at not going to Hawaii for summer and having to take public transport rather than own cars like their neighbour's children. Maybe they will even abuse the father behind his back and call him a miser. That is the cost of leadership.

"Finally: removing subsidy is not a silver bullet that solves our economic problems. And there is a huge trust deficit that government has to address. Government needs to investigate subsidy payments and punish any violations of extant guidelines. It needs to cut on unnecessary and wasteful expenditure. It needs to fight corruption and show seriousness in that. It needs to deliver on capital projects, power and infrastructure including irrigation, farm-level storage and agri-processing. These are all valid issues that are to be taken IN ADDITION to and not in place of subsidy removal.

"Since someone has decided to make insinuations about my grandfather I owe it to him to defend his record. It was my grandfather as Emir that repealed an obnoxious rule started from the days of Emir Usman that disenfranchised women from inheriting property. It was Sanusi that built the groundnut pyramids to the point where Kano NA was contributing 40pct of the revenues of the Northern region. It was Emir Sanusi who built the Bompai Industrial Estate, and turned Kano into the industrial nerve centre of the north. He was ag Gov of the northern region, Minister for Pilgrim Affairs, Chief Imam of Friday Mosque, judge and leader of the Tijjaniya order. As for his "descendants" my father was one of the very first batch of 12 Nigerians recruited by the British to set up the foreign service in 1957 and he remained in public service and rose to be Permanent Secretary before retirement. He set up in the 60s the research dept of the ministry- the present NIA so he was the first external intelligence officer in Nigeria. As permanent secretary he was the architect of Murtala Mohammed's policy on decolonisation of Africa and oversaw the independence of Mozambique and Angola and the final push to liberate Zimbabwe and South Africa.

"So yes Sanusi was not perfect. He was a feudal aristocrat. And my father was not perfect. He was also a prince and privileged to go to Oxford and LSE. But please if you want to abuse my grandfather and father kindly tell us what contributions your own grandfather and father made to the people.

"I love my grandfather and am proud to be his grandson and absolutely think it inappropriate that his name is dragged into this. "Haatuu burhaanakum in kuntum saadiqeen."

Sanusi Lamido Sanusi, CBN Governor and an activist in government
Please check the features column of the Economic Confidential to read memos and rejoinders on the positions of Sanusi Lamido Sanusi over the subsidy removal

POWER SUBSIDIES, THE LESSON

Last week the Electricity Regulatory Authority (ERA) announced up to 69% hike in power tariffs.

ERA said the increases were necessary to attract new investment in the sector and to relieve government of the billions of shillings in subsidies it has been doling out to keep power tariffs affordable.

The subsidies were deemed necessary five years ago when we had to resort to costly diesel run generators to bridge the power deficit.

"If ever there was a case study for why subsidies should be frowned on this would be a text book example...

With one fell swoop starting today Monday, manufacturers are going to pay up to 69% more for their power while domestic consumers will pay 38% more.

The unbudgeted for increase in a time of lower than usual economic activity, will lead to two things an increase in commodity prices and a possible slowdown in production. It does not take any advanced powers of prophecy to tell that this increase will be disruptive.

Price should be left to find their own level dictated by the forces of supply and demand, that way prices will move gradually up and down. Attempts to fix prices only create artificial comfort which when lifted can cause price spikes that shake out many economic players.

For instance the 69% increment if it were spread over five years would entail an annual 11% increase that would allow the economy to adjust with time.

There is the experiment where a beaker of water is heated to boiling point and when a frog is thrown in it jumps out immediately however if you put the frog in a beaker of cold water and heat it gradually the frog gets boiled to death because it adjusts to the gradual temperature increase until it’s too late.

"Subsidies are oftentimes motivated by bad politics rather than good economics. The seduction of subsidies for a government is that in the short term they appease certain constituencies in the long term however the costs far outweigh the benefits, by reducing the attractiveness of a particular sector for investors, promoting inefficiency among existing players and therefore sub-par service to consumers...

For instance power use in Uganda is slanted heavily towards personal consumption, used for powering TVs, cooking and ironing rather than industry or the productive sectors of the economy. We use power extravagantly at home because its affordable. And we continue to perpetuate this with the latest tariff hikes by penalizing the producer more than personal consumer.

One positive that is likely to come from this removal of tariffs is that new investment into generation may ensue. Our artificially low tariffs were a disincentive to investment especially in the mini-hydro dams and other alternative energies like solar power.

Hopefully we might see a boom in investment the way we have seen one in the real estate sector.

"Government resisted calls to cap rents in Kampala arguing that supply will rise to meet demand and prices will level off. There still remains a 50,000 housing deficit in Kampala but one can say it would have been worse if government had gone the spineless route of rent controlling....

It’s part of the human condition to desire certainity over uncertainity and hence calls by KACITA last week for government to prevail on banks to lower lending rates.

The raising of lending rates by banks is not to make astronomical profits, but it is in response to the prevailing circumstances.

Inflation hit a 19-year high of 30% at the end of last year. The only commodity banks deal in is money so what makes the traders – many of whom have already raised prices in their shops, think that the cost of money has not risen as well?

The knee jerk reaction is to control lending rates. Controlling lending rates would reduce the incentive for banks to lend, expand or innovate and we would have poorer banking services for it. And when we inevitably have to lift controls – as has happened with the power tariffs, we will be unprepared for the spike in lending rates. And who would be hardest hit? The businessmen.

We are all hurting from the current financial crisis, the immediate pressing need while unbearable now can be made worse in the future if we panic and take short term remedial action that will have long term detrimental damage on the economy.